Washington Post writer Allan Sloan says that the tax benefits of Apple’s plan to buy back $60 billion of its own stock will outweigh the cost of the loans it will take out to fund the buyback of the shares.
If you’re wondering why a company with a cash balance of $145b would need to borrow $60b, it’s all about tax …
Around two-thirds of that cash hoard is held by Apple subsidiaries outside the USA, and if Apple brought the cash back home it would have to pay 35% corporation tax. Borrowing the money means Apple pays interest, but the tax saving more than cancels this out…
Says Sloan: “Let’s say Apple borrows money at an interest rate of 3 percent a year (which is more than it would probably pay), and uses it to buy back stock at the current price of about $410 a share. Each share that Apple buys back will reduce its annual dividend obligation by $12.20 a share, at the company’s current dividend rate. The interest on the borrowed money would be $12.30 a share — about the same as the dividend. But interest is tax-deductible, and dividends aren’t.”
So, at a 35% tax rate the money Apple would borrow would cost Apple $8 after taxes for each share it bought back. That looks much better on the books than the $12.20 after-tax cost of a $12.20 dividend.
I’ll bet the accountants and tax lawyers in our readership are all getting chills right now…
